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May 25, 2020

Who’s Walter Schloss?


American investor Walter Schloss (August 28, 1916 – February 19, 2012) was another famous disciple of the Benjamin Graham school of investing. The noted value investor died in 2012 of leukemia.

Walter Schloss  was another great example that disproved the notion that the market was efficient. Talking of market efficiency, here’s a notable quote from legendary investor Warren Buffett in one of his letters to Berkshire Hathaway: “To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these.”

In  Walter Schloss’s case, he did not even attend college.

Here’s an excerpt from a Wikipedia account of him: “Schloss did not attend college. In 1934 at the age of 18, he started work as a runner on Wall Street. Schloss took investment courses taught by Graham at the New York Stock Exchange Institute. One of his classmates was Gus Levy, the future chairman of Goldman Sachs. He eventually went to work for Graham in the Graham-Newman Partnership.

“In 1955, Schloss left Graham’s company and started his own investment firm, eventually managing money for 92 investors. By maintaining a manageable asset size, Schloss averaged a 15.3% compound return over the course of four and a half decades, versus 10% for the S&P 500.”

Walter-Schloss

Walter Schloss won the 2012 Irving Kahn Lifetime Achievement Award from the  New York Society of Security Analysts. Part of the citation said: “In his 2006 Letter to Shareholders, (Warren) Buffett said, “Let me end this section by telling you about one of the good guys of Wall Street, my long-time friend Walter Schloss, who last year turned 90. From 1956 to 2002, Walter managed a remarkably successful investment partnership, which he did not take a dime from unless his investors made money. My admiration for Walter,  it should be noted, is not based on hindsight. A full 50 years ago, Walter was my sole recommendation to a St. Louis family who wanted an honest and able investment manager.”

In 1984, Warren Buffett named Walter Schloss as one of The Superinvestors of Graham-and-Doddsville.  The naming  was  in celebration of the fiftieth anniversary of the classic text, Security Analysis, by  Graham and Dodd.

Here’s what the Columbia Businees School said in reference to The Superinvestors of Graham-and-Doddsville by Warren Buffett: “Superinvestor” Warren E. Buffet, who got an A+ from Ben Graham at Columbia in 1951, never stopped making the grade. He made his fortune using the principles of Graham and Dodd’s Security Analysis. Here, in celebration of the fiftieth anniversary of that classic text, he tracks the records of investors who stick to the “value approach” and have gotten rich going by the book.”

Back to Walter Schloss. Here’s what Warren Buffett said of him in 1984 in The Superinvestors of Graham-and-Doddsville: “Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that’s all he does. He doesn’t worry about whether it it’s January, he doesn’t worry about whether it’s Monday, he doesn’t worry about whether it’s an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do — and is far less interested in the underlying nature of the business; I don’t seem to have very much influence on Walter. That’s one of his strengths; no one has much influence on him.”

The underlying investment approach of Walter Schloss and Warrent Buffett is value  investing. Where they differed was  perhaps in the number of stocks owned and in the thinking on the underlying nature of a business.  Warren Buffett said Walter Schloss “was far less interested in the underlying nature of the business”.

Warren Buffett said in his letter (dated Feb 28, 1997 for FY1996) to Berkshire Hathaway shareholder: “Should you choose…to construct your own portfolio, there are a few thoughts worth remembering. “Intelligent investing is not complex, though that is far from saying that it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

Later in the letter, Warren Buffet said: “In our view, though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices.”

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

Recommended reading:

(1) The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins Business Essentials)

(2) Security Analysis: Sixth Edition, Foreword by Warren Buffett (Security Analysis Prior Editions)

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